Quick Facts

Yemen’s economic freedom score is 53.7, making its economy the 133rd freest in the 2015 Index. Its score is 1.8 points lower than last year, with declines in five of the 10 economic freedoms, led by the control of government spending, business freedom, and trade freedom, outweighing improvements in monetary freedom and labor freedom. Yemen is ranked 13th out of 15 countries in the Middle East/North Africa region, and its overall score is lower than the world and regional averages.

Civil unrest and terrorism-related violence have undermined economic growth. Overall, Yemen’s economic freedom has declined by 0.5 point since 2011, primarily due to double-digit drops in business freedom and monetary freedom. Yemen has registered the eighth largest score decline of any country graded in the 2015 Index.

These declines undermine an already weak economic system. Government corruption is standard. The judiciary is semi-independent, but government weakness makes enforcing the law difficult. The economy is open to trade, but the investment regime remains closed. An underdeveloped financial sector and strict business regulations make it difficult to form and finance new ventures.

Background

Yemen is one of the Arab world’s poorest countries. Secessionists, unruly tribes, and Islamist extremists oppose its relatively moderate foreign policy and cooperation with the United States against al-Qaeda. President Ali Abdullah Saleh, forced to resign in 2011 in a deal brokered by the Gulf Cooperation Council, transferred power to Vice President Abd Rabbuh Mansur al-Hadi after a February 2012 election. The next reforms are supposed to include a constitution, a constitutional referendum, and national elections. The government initiated an economic reform program in 2006, but declining oil production, terrorism, kidnappings, clashes between Sunni and Shia Muslims, tribal rivalries, a strong al-Qaeda presence, and water shortages have undermined foreign investment, tourism, and economic growth. Yemen relies heavily on foreign aid. Economic prospects will depend on progress on the political and security fronts and implementation of critical reforms.

The government has yet to fully tackle the pervasive network of corruption and patronage built up over 30 years under former President Ali Abdullah Saleh. Auditing and investigative bodies are not sufficiently independent of executive authorities. The judiciary is nominally independent, but it is susceptible to interference from the executive branch. Authorities have a poor record of enforcing judicial rulings.

The top individual income tax rate is 20 percent, and the top corporate tax rate is 20 percent. Other taxes include a general sales tax and a property tax. The overall tax burden equals 7 percent of gross domestic product. Public expenditures amount to 36.6 percent of domestic production, and government debt is equivalent to 51 percent of the domestic economy.

The regulatory efficiency needed for more vibrant private-sector development is not institutionalized. While there is no minimum capital requirement, starting a business takes over a month on average. The rigid labor market perpetuates high unemployment and underemployment. In 2014, government efforts to reduce energy subsidies, which are very high and a major drain on the budget, sparked violent protests.

Yemen’s average tariff rate is 6.2 percent. Yemen joined the WTO in 2014. Courts do not resolve business disputes in a timely manner. The underdeveloped financial system is dominated by banks and subject to state influence. Nonperforming loans burden the banking sector. Obtaining credit for entrepreneurial activity remains difficult. The capital market is rudimentary, with no stock exchange in place.